The European Commission has re-launched a public consultation on the rules of calculating the corporate tax base. Although it is believed that the implementation of this proposal would make it easier for multinationals to operate cross-border in the EU, there is a risk that it will also mean an increase in tax base, effective tax rate and tax administration costs (for business and Tax Authority as well) in Lithuania.
Proposal for Common Consolidated Corporate Tax Base (CCCTB) aims at creating common corporate tax base calculation rules and a mechanism for “sharing” a consolidated tax base between Member States. Companies or groups using the CCCTB would be able to file a single consolidated tax return for the whole of their activity in the EU. The consolidated taxable profits of the group would be shared out to the individual companies by a specific formula based on three equally-weighted factors (assets, labour and sales). Member States will continue to decide their own corporate tax rates for their taxable share.
Example of corporate taxation under CCCTB:
A CCCTB group consists of companies A, B, C. The consolidated tax base is 900 mln. euros.
A company: assets – 100 mln. euros, payroll costs – 10 mln. euros, number of employees – 1 000, sales in A Member State – 10 bln. euros.
B company: assets – 200 mln. euros, payroll costs – 20 mln. euros, number of employees – 2 000, sales in B Member State – 20 bln. euros.
C company: assets – 300 mln. euros, payroll costs – 30 mln. euros, number of employees – 3 000, sales in C Member State – 30 bln. euros.
The calculation is as follows:
One third of 900 on capital: 100/600 – A, 200/600 – B ir 300/600 – C;
½ of one third of 900 on wages: 10/60 – A, 20/60 – B ir 30/60 – C;
½ of one third of 900 on employees: 1 000/6 000 – A, 2 000/6 000 – B ir 3 000/6 000 – C;
One third of 900 on sales: 10/60 – A, 20/60 – B ir 30/60 – C.
A’s Tax Base = 50 + 25 + 25 + 50 = 150 – taxed in MS at A’s rate.
B’s Tax Base = 100 + 50 + 50 + 100 = 300 – taxed in MS at B’s rate.
C’s Tax Base = 150 + 75 +75 + 150 = 450 – taxed in MS at C’s rate.
The proposal looks appealing from the first glance – multinational corporations would no longer have to worry about the different corporate tax rules and complicated transfer pricing system, as there would be no need to file the transfer pricing documentation under the CCCTB. But where does the danger lie?
Firstly, contrary to the former proposal of optional CCCTB, European Commission is proposing a mandatory CCCTB for multinationals. It means that if company is operating in several Member States it must calculate its corporate tax base according to the new set of rules. Formerly the Commission was discussing a proposal of optional CCCTB, allowing companies to opt-in if felt that they would truly benefit from this harmonised system.
Secondly, for most Member States, the CCCTB base would be broader than the existing national tax base. On average, the common tax base would be broader by 7,9%. If common corporate tax base was introduced, Bulgaria, Hungary, Lithuania and Latvia would be amongst those countries where corporate tax base would be expanded the most (due to tighter rules on asset depreciation and etc.). Introduction of a common corporate tax base would lead to higher future values of tax bases as well as to higher effective tax burdens. While the future value of tax base would increase by 5.57% on average and the effective tax burden would increase by 4.45% on average for the large companies, for the SMEs the future value of tax base would increase by 5.57% on average and the effective tax burden would increase by 4.45% on average. In Lithuania the effective tax burden would increase by more than 8%.
Thirdly, the introduction of CCCTB would also affect corporate finances. According to “PricewaterhouseCoopers” study (2013), introduction of CCCTB would result in a likely increase in internal annual corporate tax compliance costs (i.e. corporate tax calculation, data processing and etc.) by 5% and a likely decrease in external annual corporate tax compliance costs (i.e. filing transfer pricing documentation, software and etc.) by 22%. Related average one-off costs (i.e. renewal of processes and systems, consultations and etc.) are estimated at approximately 19 000 euros. A decrease in external costs is related to the participating companies’ expectations that elimination of transfer pricing compliance burden would compensate additional costs incurred in the application of corporate tax base apportionment methods. But companies that do not belong to CCCTB group do not indicate any significant savings. On the contrary, their experience shows that the VAT harmonization at EU level increased the administrative burden and consequently meant additional costs for business. It is necessary to keep in mind the fact that taxes are rarely harmonized in full capacity. Political compromises usually result in a number of exemptions to individual Member States.
Even though the European Commission makes no secret that one of the aims of CCCTB initiative is to increase the EU budgetary tax revenues, it is important not to get fooled. Above mentioned PwC study shows, that due to the parallel existence of two tax administration systems (national, that will be applied to companies operating in Lithuania, and the CCCTB, which will be applied to multinational companies), the State Tax Inspectorate tax administration costs will increase by 25% or 1.5 million. euros per annum. But the budgetary corporate tax revenues would increase by only 0.15% or 377 000 euros.
Finally, it must be noted that the introduction of the CCCTB would substantially reduce EU tax competition. This competition is seen as a harmful one form the states, where the corporate tax rates are the highest, perspective. But the ability to choose a country with the most attractive tax system certainly does not seem as “harmful” for business. It is no coincidence that countries applying high corporate tax rates today call on the further tax rate harmonization.
Couple of weeks ago the European Parliament held a debate on fighting the multinational corporations tax optimization activities in Luxembourg, Cyprus and other countries. But it seems that the main losers in this battle will be precisely the new Member States, whose tax system competitiveness would be reduced in the end. It is no coincidence that contrary to France and Germany, Lithuania is sceptical about the CCCTB. It is important to continue to examine the CCCTB impact on the EU competitiveness in Brussels, as it constantly done by Ireland and Great Britain.